By Hubert Rampersad, Ph.D.
Poor ethical leadership, lack of integrity, mismanagement, fraud, corruption, and violation of corporate governance rules are the main contributors towards bankruptcy and financial failures.
Some recent rare examples of corporate governance not working the way it should:
- Massive corruption at Wells Fargo, which led to the resignation of its chief executive, John G. Stumpf. In September 2016, Wells Fargo reached a $185 million settlement with federal regulators and acknowledged that thousands of employees, under intense pressure to meet aggressive sales targets, opened as many as two million bogus accounts without customers’ knowledge, in some cases forging signatures. Wells Fargo implemented one of the best corporate programs in America, advised by Harvard Law School professors.
- Corruption at Apollo Global Settles Securities Case as S.E.C. Issues $53 Million Fine. Apollo misled its investors about two different issues and separately failed to supervise a senior executive suspected of misconduct. Apollo implemented a great corporate program by one of the BIG Four Accounting firms.
- Corruption at Tesco that shocked the markets with an announcement acknowledging their profits for the previous six months were at least £250 million pounds lower than they announced a month ago. Tesco implemented a complete corporate program by one of the BIG Four Accounting firms.
Having great corporate governance programs in place but not complying to these programs has become a normal practice globally. Current approaches to corporate governance are extremely formal, bureaucratic, cosmetic, non-holistic and non-authentic, and therefore provide no protection from potentially catastrophic ethical failures.
Most corporate governance programs made things worse, create a stable basis for more corruption and are doomed to fail. We need a sustainable and innovative solution to this global epidemic urgently. I picked up where others left off by launching an innovative and sustainable methodology for creating a culture of good people, in which high ethical values are aligned with their corporate governance rules, regulations and guidelines and embedded in their mind. It is based on my new book “Authentic Governance; Aligning Personal Governance with Corporate Governance“. Two main endorsements for this book:
1) “Authentic Governance is a systematic, integrated, pragmatic, and innovative approach to corporate governance. By expanding traditional corporate governance concepts and integrating personal integrity and ethical leadership into one overall authentic governance framework, Dr. Hubert Rampersad gives us a new blueprint for sustainable corporate governance in which formal corporate regulations and personal values mutually reinforce each other. By unifying corporate ethics with individual ethics he has written an outstanding synthesis, which is addressed to the corporate challenges of managing in the 21st century.
2) This book makes a most useful contribution to the never ending challenge of protection from potentially catastrophic ethical failures. It serves as a practical guide and a tool kit for executives who aspire to realize ethical corporate excellence”.
Authentic Governance starts with value-based leadership development, embedding personal values in the mind of the Chairman, President, CEO, CFO, managers and all employees, and guiding them to sincerely reflect on these values. This is about decency and personal integrity. Authentic Governance is one of the first tangible and measurable means to create a way of life within organizations, characterized by trust, credibility, transparency, personal responsibility, personal integrity, and a high performance ethical business culture. This will have a positive impact throughout society’.
Many governments and large companies everywhere are currently very keen to revamp, develop, and implement a corporate governance code to address the above mentioned shortcomings. Unfortunately, all these codes are cosmetic and do not provide adequate protection. An other example, the collapse of Lehman Brothers seen by a lot of people, a corporate governance failure, not a failure of financial markets, in September 2008, was the biggest bankruptcy in the corporative history of the USA, and the event that conduced to the largest and worst financial crises of the last decades. The most resonant similarity with Enron is appearance of the name of a large audit firm, Ernst & Young, “they didn’t approve the Accounting Policy”, it rather “became comfortable with the Policy for purpose of auditing financial statements” (Alexandru, 2012). Two of the Lehman’s financial directors were in the past engaged in a collaboration with Ernst & Young. And in the last year of complete financial reporting, Lehman Brothers was the 8th largest customer for E&Y, and the fee paid by LB was about $185 millions. Worrying is that we are not learning from history and not to repeat the same mistakes, and those from Lehman Brothers walked the same steps of collapse as Enron did.
The situation at JPMorgan Chase, the world’s largest bank, early this year is an interesting case with regard to corporate governance. Government investigators have recently found that JPMorgan Chase devised “manipulative schemes” that transformed “money-losing power plants into powerful profit centers,” and that one of its most senior executives gave “false and misleading statements” under oath. JPMorgan executives also ignored a series of alarms that went off as the bank’s Chief Investment Officer breached one risk limit after another. Rather than ratchet back the risk, JPMorgan personnel re-engineered the risk controls to silence the alarms. In a previously undisclosed case, prosecutors examined whether JPMorgan failed to fully alert authorities to suspicions about Bernard Madoff. And nearly a year after reporting a multibillion-dollar trading loss, JPMorgan did face a criminal inquiry over whether it lied to investors and regulators about the risky wagers. This case pinpoints that JPMorgan’s corporate governance code and exhaustive regulations do not provide adequate protection. A recent study conducted by Labaton Sucharow, a New York City law firm, suggested that Wall Street still has a shaky grip on its ethical compass. Despite the financial changes enacted after the 2008 financial crisis, improper and even illegal activity is perceived as common among traders, brokers, portfolio managers, and bankers.
The table below is a summary of some other resonant cases of failure of corporate governance, in addition to the causes that led to these failures, another interesting thing to note is that most cases have occurred in the USA (Alexandru, 2012).
Behind all these scandals are a number of common factors, including:
- Poor ethical leadership and lack of personal integrity
- Mismanagement and management incompetence
- Fraud, corruption, and violation of corporate governance code of ethics
- Non-observance of the procedures stipulated in internal regulations
- Insufficient attention paid to risk management
- Inconsistent distribution of duties and responsibilities
- Inefficiency of internal audit
- Ignorance showed to the signals provided by external audit
- Influencing the external auditors to express an audit opinion inconsistent with reality.
All the above mentioned organizations have comprehensive corporate governance codes in place, implemented by some left brain accountancy firms and large law firms and advised by top Harvard Law School professors, which apparently are not working at all. They made things worse and created a stable basis for more corruption.
Unethical behavior of top-executives, poor ethical leadership, lack of personal integrity, mismanagement, fraud, corruption, and violating corporate governance codes are the main contributors towards most of these scandals. The human element represented by the directors and employees is the major cause of the mentioned failures. Especially unethical behavior of leaders is the main cause of bankruptcy and financial failures. Remember what Alan Greenspan, Former Chairman of the Board of Governors of the US Federal Reserve System, said: “Our market system depends critically on trust—trust in the world of our colleagues and trust in the world of those with whom we do business…. I am saying that the state of corporate governance to a very large extent reflects the character of the CEO.”
Higher education system Sucks as well
The main underlying reason for most corporate governance failures is the fact that the current higher education system sucks. Successful corporate governance implementation requires a multidisciplinary, authentic and holistic approach. Many top Law Schools and Business Schools such as Harvard Law School and Harvard Business School have a mono-disciplinary curriculum with a narrow non-holistic and non-authentic focus. In this way most of these schools destroy creativity and many of their graduates in the corporate governance world (such as lawyers, consultants and executives) miss the bigger picture and do not think holistically. Due to this they focus solely on formal and woolly corporate governance regulations, procedures and guidelines, causing massive damage in global business society.
Remember this: creativity and innovation in the classroom come down to the professor’s creativity, self-innovation and self-knowledge.
Many law, accounting and business management professors at these top schools are also to blame for most of the above mentioned corporate governance failures. They lack both emotional and spiritual intelligence. This inner process starts with self-knowledge, or knowing, which leads to wisdom. Between knowing and wisdom lies an enormous distance which can be reduced by systematic application of my authentic governance system. This will help them to create balance between the left and right sides of their brain. The left half of their brain has mainly an analytical, logical and quantitative function, while the right half of their brain has an intuitive and holistic function. They do not have a proper balance between the left and right sides of their brain. These professors and most of their graduates use the left side of their brain only; because of this, they miss opportunities that allow them to become more adept at using the right hemisphere of the brain and to deal with complex corporate governance problems in an integrated and authentic way. This is also the main reason why Harvard Business School professor Kaplan’s Balanced Scorecard implementations fail and lack sustainability, causing massive damage in global business society.
Why don’t you do your own due diligence by analyzing the articles being published frequently in Harvard Business Review, Harvard Law Review, MIT Sloan Management Review, California Management Review, McKinsey Quarterly, Yale Business Review,… and you will find out that almost 80% of the management/corporate governance/leadership theories and concepts being published in these top journals are just BS; not authentic, not holistic, woolly, and therefore cosmetic and not sustainable.
Left brain professors need to be encouraged to start acting intuitively thus making more effective use of their right side of their brain in order help create a better world. Therefore, my main passion is coaching left brain professors to become innovative, helping them to strengthen their management/leadership/corporate governance concept via my Exclusive Master Class Authentic Governance.
Due to the above mentioned shortcomings most companies’ approaches to corporate governance are extremely formal, bureaucratic, cosmetic, woolly, non-holistic and no-authentic, and therefore fail to address above mentioned shortcomings. Their implementations of corporate governance provide no protection from potentially catastrophic ethical failures. We need a sustainable and innovative solution to this global epidemic urgently, which I will present in the next section of this article.
A sustainable innovative solutionIt is time that we become aware that corporate governance cannot be controlled effectively with formal and exhaustive rules, regulations, guidelines, and procedures only. It’s about decency and personal integrity and this must be cultivated from within. Personal integrity has no need of rules. It must be a way of life. Remember what Plato said in 340 BC: “Good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws”. Research shows that a large percentage of the world’s population is bad. For example, America has around 5% of the world’s population, and 25% of its prisoners. Roughly one in every 107 American adults is behind bars. Among them are also many executives, leaders and professionals.
Most corporate governance programs make things worse, create a stable basis for more corruption and are doomed to fail. Why don’t we learn from Plato and focus on creating a culture of good people, in which personal values are aligned with the laws and embedded in the mind of the people, instead of focusing on laws (corporate governance) only? I picked up where others left off by launching an innovative methodology for creating a culture of good Chairmen, Presidents, CEOs, CFOs, managers and employees, in which high ethical values are aligned with their corporate governance rules, regulations and guidelines and embedded in their mind.
As demonstrated by Enron and others, traditional corporate governance codes (corporate laws) provide no protection from potentially catastrophic ethical failures. Company integrity must always start with personal integrity. It must be an informal learning process and a way of life, based on alignment with yourself and alignment with your company. This ethical process must be promoted and communicated within the whole company to all stakeholders consistently. In this way ethical behavior will become a routine in the whole organization, and leaders and employees will gain more understanding about their responsibility with regard to ethical behavior. They will understand that it is their responsibility to act ethically, on duty as well as off duty. This is a more sustainable, comprehensive and holistic approach to ethics and social responsibility.
Against this background, I propose an organic and holistic approach to corporate governance, by integrating personal values and integrity into one overall authentic governance framework, in which formal corporate regulations and personal values mutually reinforce each other. This theory has been borne out through my leadership experiences in the corporate world globally in the past 30 years. I was also inspired by the leadership vision of Harvard Business School professor Bill George, who outlined in his article ‘“Why Leaders Lose Their Way’” why powerful and talented leaders often misbehave and how they lose their moral bearings, such as: Hewlett-Packard CEO Mark Hurd who resigned for submitting false expense reports concerning his relationship with a contractor; US Senator John Ensign (R-NV) who resigned after covering up an extramarital affair with monetary payoffs; and Lee B. Farkas, former Chairman of giant mortgage lender Taylor, Bean & Whitaker, who was found guilty for his role in one of the largest bank fraud schemes in American history. According to Bill George, they can avoid these pitfalls by devoting themselves to personal leadership development that cultivates their inner compass, based on self-reflection. This process requires thought and introspection because many people get into leadership roles in response to their ego needs.
Sustainable corporate governance starts with personal leadership development, based on self-reflection and introspection and embedding personal values in the mind of the Chairman, President, CEO, CFO, managers and employees, and coaching them to reflect on these values honestly. It’s about values-based Leadership. Steve Jobs once remarked, “The only thing that works is management by values”. This is done, according to the authentic governance method I have launched in my new book; by coaching the Chairman, President, CEO, CFO, managers and employees to reflect on their “personal ambitions and their alignment with their behavior and actions.” In this way good corporate governance will be a way of life, characterized by trust, credibility, transparency, personal and social responsibility, open communication and a continuous learning process, embedded in an ethical culture. This cultural shift will have a positive impact throughout society.
Authentic Governance Model
In this article I introduce a more sustainable, authentic and holistic approach to corporate governance, which I call authentic governance. I have defined authentic governance in holistic humanized terms, namely: the systematic process of continuous, gradual and routine improvement, steering, and learning, that lead to sustainable high performance and ethical excellence. I made a distinction between authentic personal governance and authentic corporate governance, which I will explain below in detail. So, authentic governance is a continuous voyage of discovery, involving continuous, gradual and routine improvement, steering, and learning. It is about a journey towards a happier and more successful life for individuals and ethical corporate excellence.
By redefining and governing themselves effectively, leaders and employees will gain more understanding about their responsibility regarding ethical behavior, and they will understand that it is their responsibility to act ethically, on duty as well as off duty. Figure 1 shows the related authentic governance model, which provides an excellent framework and roadmap to develop, implement, and cultivate personal governance and corporate governance in a systematic and sustainable way. This new governance blueprint is an inside-out approach and focuses mainly on the human side of good governance. It places more emphasis on understanding yourself and the needs of others, meet those needs while staying true to your personal and corporate values, improve yourself and your personal integrity continuously, making ethics a way of life and a continuous learning process, and align these with formal corporate regulations, procedures and guidelines, instead of focusing on exhaustive formal corporate regulations, procedures and guidelines only.
Figure 1: Authentic Governance Model (© Hubert Rampersad)
This authentic governance model consists of the following four phases (see Figure 1), which are the building blocks of sustainable corporate governance:
1. Authentic Personal Governance:
a) Personal ambition; this phase involves a soul searching process based on thought, introspection, and self-reflection, supported by a breathing and silence exercise. Question which you can ask yourself are: Who am I, What do I stand for? What makes me more ethical? What do I live for? Why do I want to lead? and What’s the purpose of my leadership? If the honest answers on the last four questions are power, prestige, and money, you may be at risk for your company. The result of this phase is the formulation of your personal mission, vision and values. On the basis of insights acquired through this process, you develop self-awareness and self-regulation, which are the foundation of trustworthiness, integrity, and openness to learn.
b) Personal Balanced Scorecard (PBS); personal ambition has no value unless you take action to make it a reality. Therefore the emphasis in this stage is developing an integrated and well balanced action plan based on your personal ambition to develop personal integrity. It’s about translating your personal ambition into action.
c) Personal governance; the next step is to implement, maintain, and cultivate your ambition and PBS to govern yourself effectively and to become a better human being. This entails personal governance; the systematic process of continuous, gradual and routine personal improvement, steering, and learning. Your PBS needs constant updating to reflect the new challenges you take, the lessons you have learned, and the growth of yourself.
2. Alignment with yourself; corporate governance will be cosmetic if personal integrity is not a way of life in your organization and if you focus mainly on ethical procedures, formal regulations, and guidelines. Therefore it’s needed to align your personal ambition with your behavior and your way of acting (see Figure 2). So you need to commit yourself to live and act according to your personal ambition and to keep promises that you make to yourself. Personal governance built on the person’s true character is sustainable and strong. You should reflect your true self and must adhere to a moral and behavioral code set down by your personal ambition. This means that who you really are, what you care about, and your passions should come out in your personal ambition, and you should act and behave accordingly (you should be yourself) to build trust. This inner alignment is an important step towards lasting personal growth and reinforcing integrity, honesty, trustworthiness, credibility, transparency, and personal charisma. People with this perspective on life value others’ lives and create a stable basis for others to feel they are credible, truthful, and trustworthy.
Figure 2: Aligning Personal Ambition with Personal Behavior and Actions
These first two stages in the authentic governance model focus on personal leadership development by cultivating your inner compass.
3. Authentic Corporate Governance:
a) Corporate ambition; this phase involves formulation the shared corporate ambition. The corporate ambition is the soul, core intention and the guiding principles of the organization and encompasses the corporate mission, vision, and core values.
b) Corporate Balanced Scorecard (CBS); the corporate ambition has no value unless you don’t take actions to make it a reality. Therefore the emphasis in this stage is developing an integrated and well balanced action plan based on the corporate ambition to realize the corporate objectives. The CBS is needed to improve the business and governance processes continuously based on the corporate ambition in order to add value to customers and satisfy them.
c) Corporate governance; the next step is to implement, maintain, and cultivate the corporate ambition and CBS in order to govern your organization effectively, to become an ethical company. This entails corporate governance: the systematic process of continuous, gradual and routine corporate improvement, steering, and learning. This stage focuses also on the implementation of formal corporate regulations, procedures and guidelines (corporate governance code). To operate in accordance with the corporate ambition and related CBS, through its implementation using the PDAC cycle, results in a journey towards sustainable and ethical business success.
4. Alignment with your organization; the emphasis here is aligning personal ambition with corporate ambition and creating uniformity of personal and organizational values. By unifying corporate ethics with individual ethics you will create a strong foundation of peace, integrity, engagement, and learning upon which creativity and growth can flourish, and life within the organization will become a more harmonious and ethical experience. It’s about aligning personal governance with corporate governance and getting the optimal fit and balance between these two activities in order to enhance labor productivity, to create a climate of trust, and to stimulate engagement, commitment, integrity, and passion in the organization. This alignment process is needed because staff members don’t work with devotion or expend energy on something they do not believe in or agree with. If there is an effective match between their interests and those of the company, and if their values and the company’s values align, they will be engaged and will work with greater commitment and dedication towards realizing the company objectives (see Figure 3). When the personnel’s personal ambition is in harmony with their company’s (are compatible) and combined in the best interest of both parties, the results will be higher productivity and sustainable corporate governance. Employees are stimulated in this way to commit, act ethically and focus on those activities that create value for clients. This will create a strong foundation of peace, personal integrity, and stability upon which creativity and growth can flourish, and life within the organization will become a more harmonious experience.
Figure 3: Matching the Personal Ambition with the Corporate Ambition
The effective combination of all these four phases creates a stable basis for a high performance ethical organization. To illustrate the importance of this authentic governance model: Of the 140 businesses recognized by the Ethisphere Institute as the 2013 World’s Most Ethical Companies, Aflac and Starbucks have received this honor every year between 2007 and 2013.They have been judged to not only have exemplary ethical standards and policies, but also consistently high ethical practices. Their corporate governance codes are not empty words, but represent active coordinates in maintaining an ethical business culture, based on effective values‑based leadership and the alignment of personal governance with corporate governance.
Read this related article as well: How to Develop Personal Integrity https://bit.ly/2Hx7Osb
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Alexandru, P. (2012), Failure of corporate governance – intention or negligence.
Noked, N., (2012), HLS Forum on Corporate Governance and Financial Regulation.
Rampersad, H.K (2014), Authentic Governance; Aligning Personal Governance with Corporate Governance, Springer USA, New York.
Rampersad, H.K (2008),Authentic Personal Branding: A new blueprint for building and aligning a powerful leadership brand, Information Age Publishing, Conneticut.
Rampersad, H.K. (2013), Be The CEO Of Your Life, Global Vision Publishing House.
Rampersad, H.K. (2006), The Personal Balanced Scorecard; The Way to Individual Happiness, Personal Integrity and Organizational Effectiveness, Information Age Publishing, Conneticut.
Rampersad, H.K. (2003), Total Performance Scorecard; Redefining Management to Achieve Performance with Integrity, Butterworth-Heinemann Business Books, Elsevier Science, Massachusetts.
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